Company Notes Digest 9.14.17

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This week’s post features more highlights from investor conferences that were held this week. Economic commentary remains optimistic. The US economy appears to continue to perform well and no one sees signs of recession. Still, inflation seems to be creeping into the system, and monetary policy is changing, which has historically created recession.

Barclay’s financial services conference usually attracts the industry’s top CEOs. Jamie Dimon spoke there and was colorful as usual. He reminded the audience that panics do happen and made headlines for calling Bitcoin a “fraud.” Bitcoin investors should think about what happens when these two ideas intersect. If Bitcoin is really a currency, it will probably experience a run at some point (as all currencies have). When it comes to Bitcoin, which is backed by no assets, who is the buyer of last resort and at what price?

The Macro Outlook:

The US economy is doing fine

“The U.S. economy is doing fine…It’s the longest – one of the longest recoveries we’ve ever had, 10 years is the longest, I don’t think that has to end or not end. I would say a very important factor is it’s been half of a normal recovery.” —JP Morgan CEO Jamie Dimon (Bank)

It’s been a long cycle, but there aren’t signs of recession

“the last recession started in beginning of ’08, we’re a couple of months from beginning at 2018. So, it feels like we’ve been out there for a long time…the data that we’re used to seeing, none of it really indicates that a recession is coming in the foreseeable future.” —CBRE CFO Jim Groch (Real Estate)

Small and medium sized businesses are much more confident

“I’ll tell you that small and medium-sized business people are much more confident, much more optimistic…after the election they immediately became more optimistic and started moving towards investing what I call passive or replenish investment…now they are not doing expansion or investment…they are waiting on I think mostly tax reform. I think when you see tax reform, I personally believe…that will move then from just passive or replenishment investing to expansion oriented investment” —BB&T CEO Kelly King (Bank)

Credit quality is almost the best it’s ever been

“You know if you look at credit, it’s almost the best it’s ever been ever.” —JP Morgan CEO Jamie Dimon (Bank)

But inflation is picking up

“Another positive sign is that we had overall product cost inflation for the first time since 2015. As you know, the change from inflation to deflation and back again is one of the toughest environments to operate in for our stores” —Kroger CFO Mike Schlotman (Grocery)

And monetary policy is changing

“QE is still going on…all you hear now is talk about reversing that…so I’m not predicting bad things, but you don’t really know…We hope it’s seamless, we hope it’s painless…what is the chance it’s not? We never had QE therefore we never had the reversal of QE and it will have some consequences when people reverse it…So my view is, hold onto to you hats” —JP Morgan CEO Jamie Dimon (Bank)

Tighter monetary policy has historically been a leading indicator of recession

“As rates move up naturally, it will start to put some people or companies under stress. So higher rates is a little bit of a double-edged sword.” —Suntrust CEO Aleem Gillani (Bank)

There will come a day when people panic

“It’s definitely cyclical folks, I mean you will have a volatile market…people panic. People panicked in 2008 and 2009, they panicked in the 1989, they panicked in 1994, they panicked in Asia in 1997, they panicked in the Internet thing in 2000, the people will panic, you will panic. You will all be running through the door like everybody else and regulators will panic and – come on, and I just said, the government support $12 trillion securities that has to have some effect on depressing volatility…so the market will become more normal again one day” —JP Morgan CEO Jamie Dimon (Bank)

Until then, while this lasts it’s terrific

“overall, we’re in a very benign credit environment, I think you got to be careful when you are in a benign credit environment like this…because you do want to believe that it’s going to continue forever, but geez while it lasts, it’s absolutely terrific.” —Wells Fargo CEO Tim Sloan (Bank)

International:

Global air travel is growing faster than GDP

“Traffic patterns around the world continue to be very strong, we’re running about 7.7% passenger traffic growth year-to-date. We expect nominally 6% to 7% rate over the next several years and over the 20 year timeframe we’ve assumed a 4.7% growth rate” —Boeing CEO Dennis Muilenburg (Aerospace)

Financials:

The regulatory environment has been slow to change because regulators’ seats are still empty

“I think the regulatory environment has not changed a lot because we don’t have the people in their job, so you now have the OCC head which was passed by the Senate, Randy Quarles, Fed Chair, Vice Chair just passed by the senate. You don’t have an FDIC person yet, so you are not going to have these huge changes in regulations.” —JP Morgan CEO Jamie Dimon (Bank)

Loan growth has slowed because of a spike in repayments

“in July…we had a higher guidance for loan growth…We’re now revising that to be slightly down…in late July, early August, when we saw a material reduction in long-term rates, there was a huge spike in payoffs. And so that’s kind of an uncontrollable event…So we’re not concerned about loan growth. We believe it will be steady and solid as we go forward.” —BB&T CEO Kelly King (Bank)

Commercial properties are trading at 4 caps

“we’re seeing maintained high level of competition for the trophy assets, Class A properties like we own. San Francisco 222 Second traded at around the 4% cap. That’s $1,200 – low $1,200 a foot…San Diego Diamond View Tower, which is in downtown San Diego, near the ballpark traded about a week ago, going in high 4s, like 4.7%, $675 a foot. And there’s a building in Del Mar, which is our largest submarket. It’s in Ashgrove 4.5% going in yield. So prices are strong. In San Diego, we’re seeing 50 to 100 basis points over San Francisco spreads.” —Kilroy CFO Tyler Rose (REIT)

Bitcoin is a fraud

“it will eventually blow up. It’s a fraud okay. And honestly I’m just shocked anyone can’t see it for what it is.” —JP Morgan CEO Jamie Dimon (Bank)

Consumer:

Broadcasters are offsetting ratings declines with higher ad prices. Can this last?

“all-in-all, the ratings decline gets offset by the CPM increase and the total dollars continue to be very stable and that’s critical and that happened again this year and in the scattered market, we’re seeing continued strength there.” —Comcast CEO Brian Roberts (Media)

The true economics of the digital economy are still unproven

“the more time I spend talking to the advertising folks…and [ask] are you getting paid on the Facebook platform, no…and are advertisers getting their value from some of those other platforms for what they say they’re getting versus what they are getting. There is a lot of swirl around those questions.” —Comcast CEO Brian Roberts (Media)

“All the major traditional grocers have been really working on omni-channel, click-and-collect, Home Delivery, that’s been something that everyone’s been doing. Nobody’s really made any money on it, but it’s really an amenity that I think consumers are demanding. You are also going to see meal kits from Blue Apron and others continue to be interesting even though, I’m not sure any money is made there either.” —Kimco CEO Conor Flynn (REIT)

Technology:

AI holds the promise of eliminating toil

“Work is what you make and create and where productivity and economic growth come from. Toil is just doing the same thing over again and over again and over again. And I think there is a whole trend in the industry, the idea is you take your toil and try to package it, try to offshore it, try to get to the lowest cost location as possible, and for me, that’s pretty much over. Now we have the ability to eliminate it entirely.” —Mastercard President
Ed McLaughlin (Payments)

You need scale to collect data for AI

“artificial intelligence is not easy, so you need to have the scale in the resources to be able to do it…it’s not just having the data…it’s like what is the quality of those records; have you curated them? Have you cleaned them?…are they ready to do something important.” —IBM GM Deborah DiSanzo (Technology)

Qualcomm expects commercial 5G handsets in 2019

“You’ll start to see the first commercial devices in 2019. You can go to the store, buy a device with 5G in it in 2019. You’re already seeing people doing trials and early developments in the marketplace now. But the real standard compliance, new radio 5G will happen in 2019 time frame.” —Qualcomm CEO Steve Mollenkopf (Semiconductors)

China is leading the charge for 5G adoption

“Interestingly…this is the first time I’ve seen this happen with the G transitions…This is the first time that China is not waiting, and they’re really wanting to go pretty aggressively as well.” —Qualcomm CEO Steve Mollenkopf (Semiconductors)

Materials, Energy:

Oil consumption will probably continue to grow for some time

“a lot of pundits talk about the end of the internal combustion engine or you hear countries that are announcing they’re not going to have any more internal combustion engines after a certain year. You also hear a lot about peak oil demand…the world population is growing we still have 15% of the world population of 7.5 billion people that don’t have access to electricity and particularly in developing parts of the world there will be continued need for fossil fuels. In fact, the prediction is that the absolute usage…will continue to grow 2040 and beyond…in fact oil and gas usage continues to advance as people want to improve their lives” —Caterpillar President Tom Pellette (Industrial Equipment)